If consummated, a deal still only in the talking stages, could result in significant repositioning in the orthopedics sector.

Smith & Nephew (S&N; London) last month confirmed that it has held "very preliminary talks" about a possible merger with U.S. orthopedic company Biomet (Warsaw, Indiana). The medical device giant made its announcement after the Financial Times reported that the two companies were discussing a deal aimed at creating an orthopedic power producing up to $20 billion and capable of competing against the U.S. sector leaders Zimmer (Warsaw, Indiana) and Stryker (Kalamazoo, Michigan). Currently S&N and Biomet represent the fourth and fifth largest orthopedics firms in the world respectively.

S&N said in a statement: "In response to recent press speculation, the company can confirm that it has held very preliminary talks with the U.S. medical devices company, Biomet."

Biomet has been losing market share, and in April it reported that Morgan Stanley & Co. was helping it to explore ways to improve shareholder value. Following S&N's disclosure, Biomet issued a statement of its own, saying it "continues to assess all of its strategic alternatives." It added that while it has had a preliminary discussion with S&N, "it has not made a determination that it is in Biomet's best interests for it to engage in a transaction with any third party." It said that it won't disclose developments with respect to its exploration of strategic alternatives unless required.

Robin Young, a medical device industry analyst, said he "wouldn't bet against" the combination. He noted that S&N's CEO, Christopher O'Donnell, has "never lost sight of his desire to build scale in the global orthopedics market." And his interest may be wetted by the company's failed attempt to acquire Centerpulse (Zurich, Switzerland) in 2003. Rival bidder Zimmer trumped its $2.35 billion bid to buy Centerpulse with a $3.21 billion offer of its own, allowing Zimmer to become the No. 1 pure play orthopedics company.

Young said that a Biomet/S&N merger would create the largest orthopedic transaction in history, and give O'Donnell the victory he was once denied. If successful, the merger "would create the largest orthopedic company with the most employees, the most sales, the most products and the largest global footprint," Young said.

He estimated the value of the transaction would be about $10 billion — easily eclipsing Zimmer's purchase of Centerpulse in 2003 or Johnson & Johnson's (New Brunswick, New Jersey) $3.5 billion purchase of DePuy (Warsaw, Indiana) in 1998 as the largest orthopedic merger in history.

Young said that, combined, the two companies would represent the No. 1 manufacturer in a broadly defined orthopedics market with a No. 2 share in knee replacement/repair products, a No. 3 market share in trauma and a No. 4 market share in hip replacement.

J&J buy of Conor to impact DES

In another sector-impacting deal, Johnson & Johnson (J&J; New Brunswick, New Jersey) in mid-November made a $1.4 billion all-cash offer for Conor Medsystems (Menlo Park, California), thereby bolstering its already strong presence in the drug-eluting stent (DES) market and positioning it for success as second-generation devices roll into U.S. clinical use. J&J, via its Cordis (Miami Lakes, Florida) unit, said the acquisition of Conor will provide it with a "new and unique" controlled drug delivery technology currently employed on Conor's CoStar stent system. The CoStar is a paclitaxel-eluting cobalt chromium stent with a bioabsorbable polymer sold outside the U.S. Enrollment in its U.S. pivotal clinical trial has been completed, with the company expecting an approval in late 2007 or early 2008.

Cordis can claim having the first DES stent in the U.S., and the CoStar puts it on track for a pathway to a second-generation product available in the U.S., it projects, immediately in Europe and by 2008 in the U.S. Until this deal, J&J was not expected to have a next-generation DES available in Europe until 2009 and in the U.S. until 2010.

The CoStar incorporates hundreds of small reservoirs into which drug/polymer combinations can be loaded, with the intent to allow enhanced control of drug release. In addition, the CoStar features bioresorbable polymers absorbed by the body after the drug is released, which in concert with complete drug discharge, may solve the problem of delayed stent thrombosis, an important issue to the medical community with these devices as of late.

The Conor buy received mixed reviews from Wall Street, most analysts seeing it as a good step forward in a large market, but beset by a variety of issues. One of those, according to Marshall Gordon, an analyst at Credit Suisse, a potential patent challenge from Boston Scientific (Natick, Massachusetts).

Conor stockholders will receive at closing $33.50 for each outstanding Conor Medsystems share. The $1.4 billion estimated value of the deal is based on Conor's 42.7 million fully diluted shares outstanding, net of estimated cash. The deal, which still requires Conor Medsystems stockholder approval, is targeted for closing in 1Q07.

Corautus suspends VEGF-2 work, makes cuts

Corautus Genetics (Atlanta) has abandoned further clinical trials of VEGF-2 for the treatment of cardiovascular and peripheral vascular disease and has released several members of its management team. The company had 13 employees on Oct. 31 and said it expects to "significantly reduce" those numbers by Dec. 31.

The company has been focused on the development of gene transfer therapy products for the treatment of severe angina and peripheral vascular disease using the VEGF-2 gene to promote therapeutic angiogenesis in ischemic muscle.

The FDA in April blocked further enrollment in the Genetic Angiogenic Stimulation Investigational Study (GENASIS) trial following three incidents of pericardial effusion in which excess fluid builds in the sac surrounding the heart. The company responded saying it would pursue further analysis of the trial and gather additional data, and the FDA then in July put the trial on "partial hold." But the company's additional efforts have run aground, and it said it is "redirecting its focus to other life sciences opportunities."

The company said that as of Sept. 30 it had cash and short-term investments of $19.7 million.

Corautus released Richard Otto, president/CEO, and Robert Atwood, executive vice president and CFO, terming these moves "separation agreements." Both will cease being officers and employees of Corautus as of Dec. 31. Otto and Atwood will remain on the board and serve as part-time company consultants. Jack Callicutt, currently vice president of finance and administration and chief accounting officer, has been named senior VP, CFO and secretary of the company, as of Jan. 1. Corautus said it would conduct a search for a new CEO to succeed Otto.

Callicut told Biomedical Business & Technology that the company has not identified any new opportunities, as yet. "We had initially started looking at other cardiovascular therapeutics during the summer and early fall, but found nothing that matched up well with our core competencies. We just decided to scale back operations and [reduce] cash burn until we can find something that fits," Callicut said.

Other firms make cutbacks

Corautus was but one of a number of companmaking moves to reorganize and reduce expenses toward the end of the year.

• WorldHeart (Oakland, California) unveiled plans to restructure the company — including reducing its workforce by half — to control spending and focus its operations on developing its next-generation rotary ventricular assist device (VAD). But also it held a teleconference in which it said that it expects to receive $14.1 million in new financing through a private placement from existing investors, new investors and members of the company's management team.

"The financing and the significant restructuring plan are expected to fund our operations through the start of our U.S. clinical trials and on into [2Q08]," Jal Jassawalla, president/CEO of WorldHeart, said during the teleconference.

The restructuring will include a reduction in WorldHeart's workforce by 50-55 people, about 50% of its total employees, primarily at the Oakland, California, and Heesch, the Netherlands, locations. WorldHeart expects to incur initial restructuring expenses of about $700,000, primarily severance-related charges, in the 4Q06. Additional restructuring charges may be incurred and will be reported when available, the company said.

Richard Juelis, vice president, finance and chief financial officer for WorldHeart, said that the company has seen a shift in demand away from first-generation VAD products to next-generation VAD products, which has resulted in a decline in sales of its first-generation Novacor LVAS.

Juelis said the company drew in $1.4 million in 3Q06 revenues compared to $2.2 million for 3Q05, and year to date revenue at nine months was $7.7 million compared with $8 million in 2005. As a consequence, WorldHeart will reduce manufacturing, selling and administrative costs primarily associated with the Novacor LVAS, although the company plans to continue to support the product.

These initiatives are designed to enable WorldHeart to focus its resources on preparing and qualifying the next-generation Levacor rotary VAD for clinical trials in the U.S., which are expected to begin in the second half of 2007, Jassawalla said. "We see growing interest by cardiologists and surgeons to its next-generation field," he said. "To address this need we have financing in place and we have a plan in place."

"We expect to capture a significant share of this emerging market by putting all of the technical, regulatory and clinical experience we gained with the Novacor LVAS toward the development of the Levacor rotary VAD," Jassawalla said. "Furthermore, the subsequent expected development of the Novacor II pulsatile VAD, the next device in our pipeline, will give WorldHeart, potentially, the broadest product platform in this field."

The Levacor is a fourth-generation rotary VAD. It is the only bearingless, fully magnetically levitated implantable centrifugal rotary pump in clinical trials, according to WorldHeart. An advanced, continuous-flow pump, the Levacor uses magnetic levitation to fully suspend the spinning rotor, its only moving part, inside a compact housing, the company said.

Imaging and software company Merge Technologies (d.b.a. Merge Healthcare; Milwaukee) reported a "reorganization and rightsizing initiative," including the reduction of about 150 jobs, 28% of its workforce, with anticipated run-rate cost savings of $13 million to $16 million annually.

With the downsizing from about 550 personnel to roughly 400, Merge said it expects to ramp staffing to the 550 level within three to six months, utilizing its "off-shore resources" from its planned software development and support center in India with an anticipated annual run-rate cost of about $4 million to $6 million. It also said it will be closing offices in San Francisco and Tokyo and downsizing operations in Burlington, Massachusetts, Cleveland, and Toronto.

The company has undergone several problems recently. In early July, the company said it had uncovered improper accounting that required it to restate financial reports from 2002 to 2005 and prompted the resignation of three executives, including its then-interim CEO, William Mortimore.

Beginning in early January, Mer received a number of anonymous letters alleging improprieties relating to the company's financial reporting, fulfillment of customer contracts and disclosure practices. The letters contained charges of improper revenue recognition.

• Implantable device components manufacturer Greatbatch (Clarence, New York) reported that it will consolidate its corporate and business unit, including the limination of 40 positions. A "significant portion" of the annual savings will be reinvested into R&D activities and business growth opportunities, it said.

Thomas Hook, company president/CEO, said, "We have successfully completed two-thirds of our three-year plan to consolidate facilities. It is now time to align our organization and cost structures to be consistent with our facilities footprint and the way we will manage our business.

"This planned organization change will enable more aggressive investment in core product technologies and other business opportunities ensuring Greatbatch's continued growth. In addition, the organization change combined with the consolidation of facilities will substantially improve the company's cost structure."

The company estimated the savings at $8 million to $10 million upon plan completion, and will generate annual net savings of $2 million to $4 million. About $6 million will be reinvested in critical areas including R&D and product engineering, it said. The severance costs associated with the consolidation plan are estimated to be $2.1 million to $2.3 million, the majority recorded in the Q406. As a result, the company is decreasing its full year 2006 diluted DPS guidance by 6 cents from the range of 71 cents to 77 cents per share to 65 cents to 71 cents per share.

Gore exiting plastic surgery

W.L. Gore & Associates (Flagstaff, Arizona) reported that it will no longer sell or market products in the plastic surgery market. It said the decision is limited to all Gore Subcutaneous Augmentation Material (GORE S.A.M.) products, including Trimensional 3-D implant extended chin, nasal dorsum and malar, sheets, sutures for plastic surgery applications, facial slings and strands.

Dick Winkelmayer, business associate, said, "Our strategic focus will be in the cardiovascular and general surgical specialties." He said plastic surgery is no longer core to its future business.

The company said that to give customers time to consult with their healthcare providers and transition to alternatives, it will take orders until the end of the 2006, and Gore S.A.M. orders will be shipped through April 2007, "subject to inventory availability."

Gore says that products in its medical division have been implanted in 18 million procedures. Its products include vascular grafts, endovascular and interventional devices, surgical meshes for hernia repair and sutures for use in vascular, cardiac and general surgery.

eNotes, SurgiLance change names

eNotes Systems (Los Angeles), a telemedicine company connecting healthcare providers with patients remotely via "live" real-time two-way video, audio, and medical data communications, reported that it has changed its name to Veridigm. The company has applied for a new trading symbol.

The name change follows recent company expansion, it said, including the opening of a New York office and the appointment of healthcare industry insider Ruben King-Shaw Jr. as head of the company's advisory board.

Jeff Flammang, company president/CEO, said, "Veridigm means 'truth at a distance,' and by removing the distance between doctor and patient with real time technology, that's exactly what we deliver."

SurgiLance (Singapore) also reported a name change, to MediPurpose. The change reflects a new direction, especially plans for further expansion into Europe, South America and Asia, and a more diverse product portfolio, the company said.

Founded in 1999 as SurgiLance, the company launched its first product, the One-Step Safety Lancet, in 2000. Since then, the company said, it has established solid channels of distribution and GPO relationships.